Market Insider

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August 04, 2016

Grains entered the month of August with little fanfare as the market continues to sit near the lows. Hedge funds continue to pile on their bearish bets in the grain markets, especially on wheat and corn which are sitting at net short positions that are echoing last summer. Most analysts are now conceding that the weather that’s on the horizon in August is unlikely to provide many problems for U.S. soybean development, likely leading to more reduction in managed money’s long positions. Those betting on corn are also under the gun that is a large crop in the U.S. and also that there’s a lot of wheat in the U.S. that will compete with it in the feed market. Simply put, there are new supply realities here in North America that the market now has to work through.

Globally, the Black Sea harvest is ahead of last year’s pace with average yields anywhere from 5-10% better than a year ago. As such, Russian and Ukrainian grain production estimates continue to rise. To the west in the European Union, the wheat market is trading a little sideways until there’s a full understanding of the quality of the crop coming off. While German producer organizations have suggested a 10-20% drop in wheat production this year in their country, more forecasts for France continue to suggest a wheat crop below 30 million tonnes. As far as the E.U. rapeseed harvest goes, Strategie Grains cut its estimate for the 3rd straight month to 20.7 million tonnes, mainly due to cuts in France, Poland, & Germany. As such, import forecasts for rapeseed/canola in 2016/17 was increased by Strategie Grains to 3.3 million tonnes and the International Grains Council to 3 million tonnes, both a healthy improvement from last year’s 2.86 million tonnes imported by the bloc.

Speaking of imports, it’s been suggested that with the big crop coming off in the U.S., American exports are poised to increase. While North American wheat still has to compete with currency and geography effects against the Black Sea, futures markets are trading at a discount to Paris bourses. For U.S. corn, Brazil may need some but it’s likely they’ll source from Ukraine, Argentina, or Paraguay first. The real bullish factor we’re watching for is La Nina affecting South American planting conditions in the fourth quarter of this calendar year. The “Little Girl” tends to bring wetter-than-normal conditions to northern Brazil but cooler temperatures and drier weather to eastern and southern states. Similar dry weather is possible in Argentina, which is currently seeing a delay in their wheat planting because of persistent rains.

What does this mean for prices? In Western Canada, we are starting to see some better basis levels in canola for early 2017 movement, and we would recommend looking at low double digit basis and be able to price out futures sometime in the next 6 months. Net cash canola prices today are still sitting below $10/bushel but we think that between some disease concern & the aforementioned South American planting risks, there will be upside from here. Cash wheat prices in Western Canada are potentially starting to find their bottom with CPS wheat for deferred delivery climbing back above $5/bushel and hard red spring wheat prices back above $6 for early 2017 movement. Spot prices and new crop September/October harvest delivered prices are starting to calibrate against one another (with the latter coming up to meet the former’s decline). Pulse prices remain suppressed although questions remain on lentils but yellow peas still remain $8/bushel and green peas trading about a dollar higher. These levels we can still support selling another 10% block at, given US and Black Sea competition, and the other elephant in the room, India.

As it stands, things are still sitting well below mid-June highs. At this point, if we don’t see above average yields in the majority of crops grown in North America this year, it would be a shock. Recent yield estimates for corn and soybeans has been as high as 175 and 48.8 bushels per acre (U.S.D.A. at 168 and 46.7 respectively). Should these numbers material, there’s a lot more risk to the downside yet to play out in corn and soybeans in our opinion. Add in that oil prices are moving back to April levels, while cash prices in Western Canada may be near or start to stabilizing in some crops, those trying to catch the falling knife in the futures markets face the reality of potentially being badly cut.